Only three months ago the Co-operative Group began moving into its swanky new headquarters in the centre of Manchester. At a cost of £100m, the glass-fronted cylindrical building epitomises the ambition of this 169-year-old organisation, Britain's biggest mutual, under the leadership of Co-op veteran Peter Marks. He oversaw the takeovers of Britannia building society and Somerfield supermarkets, adding to a business spanning funeral homes, groceries and travel agencies.

But with the transfer of staff to the new building not even complete, the Co-op was on Friday facing questions about a key plank of its empire – financial services – after Moody's downgraded Co-op Bank's rating to junk.

The problem can be traced back three years to the marriage between Co-operative Financial Services and Britannia building society in early 2009. Four years on, Britannia's commercial property loans, sub-prime mortgages and buy-to-let loans are now exploding on the balance sheet of the Co-op, and the Moody's analysis is the most detailed yet of the £600m loss reported by the bank in March. While rival rating agency Fitch had downgraded Co-op Bank a month ago, Moody's analysis is far more stinging: the Co-op does not have shares but an illustration of the City's anxiety was a 20% fall in the price of its bonds.

The Co-Op has £11bn of troubled operations, where likely losses on bad loans rose from just £23m a year ago to £351m by the end of last year. Around £149m of that is from just 12 big commercial property loans granted by Britannia. Moody's expects the bill to climb higher.

The ratings agency also points out the two businesses have yet to be integrated. Part of this is due to the Co-op's ambitious and recently abandoned attempt to take over 632 branches of Lloyds that slowed the integration of the Britannia. A computer upgrade was also a casualty of the deal as the Co-op had been expecting to use Lloyds' IT systems. The Lloyds deal would have eased the Co-op's financial problems, bringing £1.5bn of capital, but the Co-op could not complete the takeover. It was also bringing a new management team from Lloyds.

Now Co-op Bank needs new management – the interim bank boss, Barry Tootell, quit on Friday – and it also needs to dust down its old IT system.

The deal for the Lloyds branches had been under negotiation when City regulators, now the Prudential Regulation Authority, had been getting tougher on banks. It is not yet clear how much more capital the Co-op needs – it could be £1bn – but the bank insists selling off businesses will be enough to plug the gap and it won't have to turn to the taxpayer.

Peter Marks retires at the Co-op's AGM next Saturday, handing over to former B&Q boss Euan Sutherland. A retailer is therefore going to have to sort out a big banking problem.